Thursday, February 4, 2010

Questioning China's Economy

Short China? [John Derbyshire]

For those still following the echoes from Tom Friedman's January 12 "Is China the Next Enron?" column (Tom answered No, because China is a spiffy MODERN nation under ENLIGHTENED LEADERSHIP with a DISCIPLINED population), here is China-finance expert Michael Pettis firing a broadside at Friedman.

"First," [Friedman] warned, "a simple rule of investing that has always served me well: Never short a country with US$2 trillion in foreign currency reserves."
Really? Friedman proposed the rule sarcastically — as both untestable and too obvious to need testing. It is so obvious that no country has ever had such high levels of reserves, so you can’t really test the hypothesis, but it’s also pretty obvious that a country with $2 trillion in reserves is in great shape. Anyone who wanted to short it must be pretty stupid right ?

But [these reserves] are not unprecedented. Twice before in history a country has, under similar circumstances, run up foreign reserves of the same magnitude.

The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world." . . . The second time occurred in the late 1980s, when it was Japan’s turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP …

Notice, by the way, how Pettis describes himself there at top right, brazenly refusing to do the Onomastic Cringe:

Michael Pettis is a professor at Peking University’s Guanghua School of Management . . .

Re: Short China [Stephen Spruiell]

John, there's a video of investor Jim Chanos, mentioned by name in Friedman's column, that's making the rounds, in which Chanos lays out his case for why China's economy is due for a reversal. It's 57 minutes long but worth watching.
Shorting China [Jonah Goldberg]

Since there's a lot of chatter about it, I thought I'd cough up this old column of mine from late 2008.
An excerpt:

Ask yourself this: Why are we in this financial crisis?Any short list of reasons would include a lack of transparency in markets and regulatory rule-making; collusion between business and government; the politicization of lending practices (including the socialization of risk and the privatization of profit through giant governmental entities like Fannie Mae); and, of course, simple greed.

Does anyone honestly think China doesn’t have these problems ten times over? It has no free press, no democratic accountability, and no truly independent regulators.After every Chinese earthquake, we discover that safety inspectors couldn’t be trusted to oversee the construction of schools and hospitals. And we’re supposed to believe that China’s corrupt model produces toxic baby formula but spic-and-span finances? There’s an honest debate about how much blame institutions like Fannie Mae and laws like the Community Reinvestment Act deserve for the financial crisis, but few honest observers dispute that they played some kind of deleterious role. Well, China’s entire economy is one big Fannie Mae, its laws one big Community Reinvestment Act.I’m willing to bet that the bill for that comes due long, long, long before China catches up with the United States of America.
China's Property Boom [John Derbyshire]

A reader reminds me of the realities behind the development boom in Friedmanistan, and wonders: "Does Friedman even read his own newspaper?"
Simon Property CEO David Simon on Feb 5 earnings conference call:
At year end we also sold our joint venture interest in the development and operations of our shopping centers in China. The interests were sold to affiliates of our Chinese partner for approximately $29 million, resulting in a loss of approximately $20 million. We built a good product there but the middle class consumer is just beginning to spend discretionary income. It will take a long time for them to fully emerge to shop and spend at moderate to better stores. Remaining in these joint ventures in China would have required additional SPG time and resources, as well as the need to fund operating losses. We believe that we have better opportunities to deploy that capital elsewhere.